To walk away or not to walk away – what is a genuine offer to compromise?

Australian Courts in 3 different jurisdictions have recently considered the issue of whether an offer of settlement was ‘a genuine compromise’ warranting an order for indemnity costs. The results in each case demonstrate the factors that a Court will weigh up in determining an entitlement (or otherwise) to indemnity costs. Insurers and their advisors should be aware of these factors before making walk away offers (and offers of compromise) in litigated proceedings, to ensure that maximum costs protection is obtained in the circumstances of each particular case.

The recent Full Court Federal Court decision in Verrochi v Direct Chemist Outlet Pty Ltd (No 2) [2016] FCAFC 162 dealt with a walk away offer made in the context of an appeal. The offer provided that the appeal be discontinued and that the parties bear their own costs of the appeal. The Court held that the offer was not a genuine offer of compromise in the sense that there was no real and genuine element of compromise. For ‘walk away’ offers, in essence the Court must find that the proceeding was untenable or vexatious in order to determine that it was unreasonable for the offer to have been rejected. The Court held that nothing in the offer indicated why the recipient should re-assess the prospects of their appeal differently, and nothing else had changed since the filing of the notice of appeal.

By contrast, in James v The Owners – Strata Plan No 11478 (No 2) [2016] NSWSC 1701, Darke J recently held that a walk away offer made by defendants was an offer of compromise of a character that engaged the operation of the indemnity costs provision in the NSW Uniform Civil Procedure Rules. In James, the plaintiff’s claims against the defendants were claims for compensation or damages for breach of an alleged duty of care, or for oppressive conduct, which were not of an all or nothing character. Further, by the time the offer was made (more than 2 years after the commencement of the proceedings) the defendants had incurred a substantial amount of costs in their defences to the claims. The offer, which involved the giving up of any claim against the plaintiff for costs, could not be regarded as derisory, or as an invitation to surrender rather than any form of commercial compromise. The Court held that the offer truly involved a significant element of compromise. It was made at a time when the parties were in a good position to give due consideration to the strengths and weaknesses of their cases, before finally proceeding towards trial. The offer was made approximately 6 weeks before the hearing was due to commence, and not long before the parties were due to attempt mediation. Darke J held that the public policy of encouraging settlement would be served by holding that the offer successfully triggered the indemnity costs mechanisms under the Rules. The case shows that what amounts to a derisory offer as opposed to an offer containing a sufficient element of compromise is to a large extent a matter of impression.

Finally, yesterday in Stevens v Spotless Management Services Pty Ltd (No 2) [2016] VSCA 311, the Court of Appeal of the Victorian Supreme Court made an indemnity costs order after determining that a substantive offer of compromise made in a contractual dispute was a genuine offer of compromise. The Court confirmed that the question of whether an offer is ‘of a genuine compromise’ does not depend simply on the magnitude of the discount embodied in the offer. While that is clearly a relevant consideration – in the sense that a ‘trivial, contemptuous or derisory discount’ would not involve a genuine compromise – other factors are also relevant. They include the apparent strength of the defendant’s case at the time the offer was made, whether the case is an ‘all or nothing’ case which makes it difficult to select a discount based on an assessment of particular aspects of the case, and the stage at which the offer was made. In this case, the first offer was made after pleadings had closed. It involved a discount of about 17 per cent from the amount claimed, or $75,400. The offer could be characterised as trivial or derisory, or as an ‘invitation to surrender’. It was a genuine offer of compromise.

The costs benefits of making offers to settle litigation will continue to see disputes and Court decisions in this area. Parties (including insurers) should position themselves in the best possible way when considering the timing and amount of any costs protective settlement offers, including walk away offers.

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